Renounce or relinquish?

And speaking of the State Pension,........is it includable as an asset?

Perhaps not.

Phil Hodgen says:

Section 877A gives us some guidance for how to determine fair market value for purposes of the mark-to-market event: use estate tax valuation principles for almost every asset, except for two categories of assets for which the gift tax valuation principles are required.

http://hodgen.com/chapter-5-mark-to-market-taxation/

The two gift tax categories are insurance policies and trust interests, so the UK State Pension comes under estate tax valuation rules.  The instructions for Form 706 (United States Estate (and Generation-Skipping Transfer) Tax Return) state, under "Schedule I - Annuities":

These rules apply to all types of annuities, including pension plans, individual retirement arrangements, purchased commercial annuities, and private annuities.
In general, you must include in the gross estate all or part of the value of any annuity that meets the following requirements:
It is receivable by a beneficiary following the death of the decedent and by reason of surviving the decedent;

As the UK State Pension is not receivable by a beneficiary following the death of the pensioner, this appears to me to mean that the UK State Pension should not be included as an asset for Form 8854 Part V.   But of course I may be misinterpreting.

Perhaps not.

Phil Hodgen says:http://hodgen.com/chapter-5-mark-to-market-taxation/

OK, now you've lost me. Hodgen is talking about "mark-to-market" in this chapter. A pension plan is not mark-to-market, but deferred compensation.

According to Hodgen:

"The mark-to-market rules apply to all property of a Covered Expatriate except:
◾Any “deferred compensation item;”"

Under IRS instructions for 8854, line 7a:
"Generally, a deferred compensation item is one of the following.
2.Any interest in a foreign pension plan or similar retirement arrangement or program."

It then states:
"Eligible deferred compensation item means any deferred compensation item with respect to which: (i) the payer is either a U.S. person or a non-U.S. person who elects to be treated as a U.S. person for purposes of section 877A(d)(1)"

Line 7b states:
"Ineligible deferred compensation item means any deferred compensation item that is not an eligible deferred compensation item."

My guess:
The UK State pension relates to line 7b and is an "ineligible deferred compensation item".
Form 8938 (FATCA) says State sponsored pension plans are not includable, but that's only for 8938. Is a UK State Pension an ineligible deferred compensation plan for the purposes of 8854? I don't know the answer to that one. Perhaps a following chapter from Hodgen on deferred compensation will answer that question.

https://www.irs.gov/instructions/i8854/ar01.html#d0e603

EDIT - Just to be clear:
Line 7b on page 3 of 8854:
"Do you have any ineligible deferred compensation items? If “Yes,” you must include in income the present value of your account on the day before your expatriation date.."
I would guess the same applies for a LA pension as well.

https://www.irs.gov/pub/irs-pdf/f8854.pdf

Here's Hodgen on "deferred compensation":

http://hodgen.com/chapter-7-taxation-of-deferred-compensation/

This has always been the puzzle for me: (from Hodgen)
"Deferred compensation items (think “pensions”) will either be taxed as a lump-sum distribution or tax will be withheld as distributions are made to you. This applies, however, only to Covered Expatriates."

So,..... do you calculate them to determine IF you are a covered expatriate, or do you ignore them in first calculations, and only include them if the first calculations determine you are a covered expatriate? From what I've observed, they are part of the first calculation. I may be wrong.

OK, now you've lost me. Hodgen is talking about "mark-to-market" in this chapter. A pension plan is not mark-to-market, but deferred compensation.

According to Hodgen:

"The mark-to-market rules apply to all property of a Covered Expatriate except:
◾Any “deferred compensation item;”"

Under IRS instructions for 8854, line 7a:
"Generally, a deferred compensation item is one of the following.
2.Any interest in a foreign pension plan or similar retirement arrangement or program."

It then states:
"Eligible deferred compensation item means any deferred compensation item with respect to which: (i) the payer is either a U.S. person or a non-U.S. person who elects to be treated as a U.S. person for purposes of section 877A(d)(1)"

Line 7b states:
"Ineligible deferred compensation item means any deferred compensation item that is not an eligible deferred compensation item."

My guess:
The UK State pension relates to line 7b and is an "ineligible deferred compensation item".
Form 8938 (FATCA) says State sponsored pension plans are not includable, but that's only for 8938. Is a UK State Pension an ineligible deferred compensation plan for the purposes of 8854? I don't know the answer to that one. Perhaps a following chapter from Hodgen on deferred compensation will answer that question.

https://www.irs.gov/instructions/i8854/ar01.html#d0e603

You're right that I'm wrong     though it's a more basic error than misclassifying a pension.  Hodgen says plain as day that the chapter is only for Covered Expatriates.  A statement I completely overlooked...   

Apologies.   

Still, I wonder if it may be the case that the Estate Tax rules are relevant also for Naked Expatriates completing Part V.

More digging needed.

Here's Hodgen on "deferred compensation":

http://hodgen.com/chapter-7-taxation-of-deferred-compensation/

This has always been the puzzle for me: (from Hodgen)
"Deferred compensation items (think “pensions”) will either be taxed as a lump-sum distribution or tax will be withheld as distributions are made to you. This applies, however, only to Covered Expatriates."

So,..... do you calculate them to determine IF you are a covered expatriate, or do you ignore them in first calculations, and only include them if the first calculations determine you are a covered expatriate? From what I've observed, they are part of the first calculation. I may be wrong.

Covered Expatriates have to complete 8854 annually for some years - ten?  I think that's who Hodgen and Part IV Section B are addressing.

Covered Expatriates have to complete 8854 annually for some years - ten?  I think that's who Hodgen and Part III Section B are addressing.

It all depends on when you renounce/relinquish. From 1996 to 2004 (? I'm flying blind here since I'm depending on my memory), the ten year rule applied. After 2004 (Sec. 877?, or 2008 Sec. 877A?) it became 8854 and a one shot filing (only 8854, and only one year). That's why it's always most important for those electing to relinquish (if they can) to know the date of the original relinquishing act. (And also for the different sections on 8854.) Then, there's the debate as to whether that date is the date when they file with DoS for the relinquishment. ALL very murky waters, and very dependent on a tax advisor (or taxpayer) taking a specific stand. They may, or may not, be successful.

It all depends on when you renounce/relinquish. From 1996 to 2004 (? I'm flying blind here since I'm depending on my memory), the ten year rule applied. After 2004 (Sec. 877?, or 2008 Sec. 877A?) it became 8854 and a one shot filing (only 8854, and only one year).

Annual filing also for Covered Expatriates who elect to defer payment (Note under "When to File" in the Instructions)

There must be quite a few Covered Expatriates who have no option but to elect deferred payment.  Horrible.

There must be quite a few Covered Expatriates who have no option but to elect deferred payment.  Horrible.

Agreed. Deferring payment for "eligible deferred compensation" means paying an automatic 30% exit tax on each payment once payments begin. Unfortunately, that generally means only for US eligible plans (401, 408, etc, whatever they are!). Foreign pensions, and overlooking the possibility of having a foreign pension plan treat the covered expatriate as a US Person for deferred payments, result in the plan being deemed as a lump sum payable for the full value of the plan on the day before renunciation. If the person (covered expatriate) does not have sufficient excess savings (for example) or investments which can be sold, they will owe the full tax when filing the 8854 (plus quarterly pre-payments?) with few financial resources. There will likely be a high tax bracket plus NIIT. If they have no or little savings, and no or little investments that can be sold, then they're up the creek. How will they pay? The IRS may set up a delinquent payment plan if need be (interest and penalties?), or the expatriate may have to borrow the money from a bank (collateral?), or sell their home if they have one, or take equity release, in order to renounce.

Quite a price to pay just to give up US citizenship.

That's why you don't want to be a covered expatriate, and why some people wait for years, gifting the max each year to a spouse or other, just to be below the $2M figure when they are able to renounce. You lose no matter which way if you're an average punter. Do all the right things (pay off a mortgage, have a pension(s), and save or invest within US rules), decide to renounce when you're older and values are at their maximum, and you may find yourself a covered expatriate. The Super-Rich may be able to afford it.

It's also why some people decide not to renounce, and then must figure a way to support US tax reporting as a foreign resident. Some have reportedly gone back to the States, not because they wanted to, but because it was the only way they could survive.   

Me, I'd choose bankruptcy over going back to America.  Like a shot.

The 8854 instructions say:

You can use the balance sheet in Part V (Schedule A) to arrive at your net worth.

IRS Notice 97-19 (http://www.unclefed.com/Tax-Bulls/1997/Not97-19.pdf) says:

Determination of net worth. For purposes of the net worth test, an individual is considered to own any interest in property that would be taxable as a gift under Chapter 12 of Subtitle B of the Code if the individual were a citizen or resident of the United States who transferred the interest immediately prior to expatriation. For this purpose, the determination of whether a transfer by gift would be taxable under Chapter 12 of Subtitle B of the Code must be determined without regard to sections 2503(b) through (g), 2513, 2522, 2523, and 2524.
An interest in property includes money or other property, regardless of whether it produces any income or gain. In addition, an interest in the right to use property will be treated as an interest in such property. Thus, a nonexclusive license to use property is treated as an interest in the underlying property attributable to the value of the use of such property.

A UK State Pension cannot be transferred, so cannot conceivably be taxable as a gift.  So I think it should not be included as an asset for the 8854 Balance Sheet.  Only as income (Schedule B).

IRS Notice 97-19 (http://www.unclefed.com/Tax-Bulls/1997/Not97-19.pdf) says:

OK, you've lost me again.

Your link is to the preliminary release of an amendment to Section 877, dated 20 August 1996. (And I got the date wrong in an above post, 877 began in 1966.) 877 was amended again in 2004 after the above. The HEART Act, passed in 2008, created a new section, 877A.

Give me links to Section 877A that bear out your stance, and I'll listen.   

OK, you've lost me again.

Your link is to the preliminary release of an amendment to Section 877, dated 20 August 1996. (And I got the date wrong in an above post, 877 began in 1966.) 877 was amended again in 2004 after the above. The HEART Act, passed in 2008, created a new section, 877A.

According to Phil Hodgen (and not only Phil Hodgen), it's still Notice 97-19 that sets out how to determine net worth.

Section 2.  Net Worth Test

The most common way to become a Covered Expatriate is by having a net worth of more than $2,000,000. This is the “net worth” test.

The $2,000,000 figure is not adjusted for inflation.

The method for determining net worth is described in Notice 97-19 issued by the IRS.

What You Include
Assets
The assets that you look at are “any interests in property” that would be taxable as a gift if you gave them away the moment before you expatriated. Look at the gift tax rules to see if you would trigger a gift tax by giving the assets away.

An “interest in property” is a carefully defined term. It does not matter whether the property produces income or not. It includes the right to use property, as well as ownership.

For purposes of your analysis, you treat the assets you can give away as part of your balance sheet. However, gift tax exemptions and deductions are ignored in calculating net worth. These include the annual exclusion, transfers to certain minor’s trusts, transfers for certain medical and education expenses, the exemption for certain waivers of pension rights, and the exclusion of certain loans of artwork. In addition, the gift splitting, gift tax charitable deduction, gift tax marital deduction, and limitation on deduction rules are ignored for the net worth test in determining Covered Expatriate status.

http://hodgen.com/chapter-4-are-you-a-covered-expatriate/

Give me links to Section 877A that bear out your stance, and I'll listen. 

No worries.  I'm only expressing my own view.  Definitely not offering advice, or recommending what anyone else should do, think, or believe.    

Ain't this fun! 

OK, "The Phil" says Notice 97-19 applies for 877A:
"The assets that you look at are “any interests in property” that would be taxable as a gift if you gave them away the moment before you expatriated.....For purposes of your analysis, you treat the assets you can give away as part of your balance sheet."

Can you give a UK State Pension (or ANY pension) away as a gift. Logic says no. (But since when was logic a part of Title 26?)

If you follow this line of logic, you do the initial calculations leaving out pensions. If it's over $2Mil., you're a covered expatriate. When you do the final calculations for your final 1040 with 8854, as a covered expatriate, you include the value of the pensions on the return (deferred compensation).

Time to have a very close read of 877A, not that I'm going to disagree with Hodgen. I remain sceptical, but would very much like to believe this. Unfortunately, we often let what we want to believe to guide us to an unpleasant end.

I would file this under one tax advisors' stance and would search for similar stances. There's a lot of interpreting small print around what applies and doesn't apply when using the gift tax rules for the 8854 balance sheet. We also need to understand that Phil is talking about ALL items on the balance sheet, and not mark-to-market items only, although he seems to disregard any thought of deferred compensation items for arriving at the balance sheet.

Interesting.

Ain't this fun! 

OK, "The Phil" says Notice 97-19 applies for 877A:
"The assets that you look at are “any interests in property” that would be taxable as a gift if you gave them away the moment before you expatriated.....For purposes of your analysis, you treat the assets you can give away as part of your balance sheet."

Can you give a UK State Pension (or ANY pension) away as a gift. Logic says no. (But since when was logic a part of Title 26?)

If you follow this line of logic, you do the initial calculations leaving out pensions. If it's over $2Mil., you're a covered expatriate. When you do the final calculations for your final 1040 with 8854, as a covered expatriate, you include the value of the pensions on the return (deferred compensation).

Notice 2009-85 (https://www.irs.gov/irb/2009-45_IRB/ar10.html) says:

SECTION 3. MARK-TO-MARKET REGIME

A. Identification of a covered expatriate’s property and determination of fair market value

For purposes of the mark-to-market regime, the covered expatriate is deemed to have sold any interest in property that he or she is considered to own under the rules of this paragraph other than property described in section 877A(c). For purposes of computing the tax liability under the mark-to-market regime, a covered expatriate is considered to own any interest in property that would be taxable as part of his or her gross estate for Federal estate tax purposes under Chapter 11 of Subtitle B of the Code as if he or she had died on the day before the expatriation date as a citizen or resident of the United States. Whether property would constitute part of the gross estate will be determined without regard to sections 2010 through 2016. In addition, for this purpose, a covered expatriate also is deemed to own his or her beneficial interest(s) in each trust (or portion of a trust), that would not constitute part of his or her gross estate as described in the preceding sentences. The covered expatriate’s beneficial interest(s) in such a trust shall be determined under the special rules set forth in section III of Notice 97-19, 1997-1 C.B. 394.

In computing the tax liability under the mark-to-market regime, a covered expatriate must use the fair market value of each interest in property as of the day before the expatriation date in accordance with the valuation principles applicable for purposes of the Federal estate tax, except as otherwise provided in this paragraph. Specifically, fair market value will be determined under section 2031 and the regulations thereunder, but without regard to sections 2032 and 2032A, as if the covered expatriate had died as a citizen or resident of the United States on the day before the expatriation date. For these purposes: (a) the provisions of sections 2701 through 2704 will be applied as if the covered expatriate’s interests subject to those provisions were being transferred to family members; (b) the covered expatriate’s tax liability as a result of section 877A, or otherwise, will not be taken into account; and (c) sections 2055, 2056, 2056A, and 2057 will not be taken into account. A covered expatriate must determine the fair market value of his or her beneficial interest in each trust, other than a nongrantor trust subject to section 877A(f), to the extent the trust would not constitute part of his or her gross estate, in accordance with the Federal gift tax valuation principles of section 2512 and the regulations thereunder without regard to any prohibitions or restrictions on such interest. An interest in a life insurance policy will be valued in accordance with Treas. Reg. § 25.2512-6 as if the covered expatriate had made a gift of the policy on the day before the expatriation date.

So, a different calculation, based on different rules from the net worth test, and (except for the exceptions!) applying estate-tax principles rather than gift-tax principles.

We also need to understand that Phil is talking about ALL items on the balance sheet, and not mark-to-market items only...

The balance sheet is Schedule A (Assets and Liabilities).  Mark-to-market guesstimates are demanded for all the assets mentioned.

The balance sheet is Schedule A (Assets and Liabilities).  Mark-to-market guesstimates are demanded for all the assets mentioned.

I have no idea if the following is correct or not, which is why if I decided to go down the renunciation route, I'd check with a competent dual qualified expert to be sure there were no nasty surprises.

As I read it (for someone renouncing in 2015):
Part IV, Section A, Line 2: "Enter your net worth on date of your expatriation for tax purposes."

The instructions for Part IV, Section A, Line 2 state: "You can use the balance sheet in Part V (Schedule A) to arrive at your net worth."

Part V (Sch. A) asks for FMV (fair market value) of all items listed. Line 6 is for "Pensions from services performed in the United States", and Line 7 is for "Pensions from services performed outside the United States". Completed examples I've seen of this form show the full value of the pension listed (the full worth of an amount which would support such a pension for, example, 20 or 30 years).

Line 25 (Net Worth) is used for Line 2 of Part IV, Section A. If it is over $2Mil., then the filer is a covered expatriate.

You then eventually proceed to Part IV, Section B, and establish the deferred compensation, and how it is to be taxed (eligible, ineligible). When completing the final 1040, this information along with all the "gift tax"/"estate tax" considerations come into play. But the original determination of whether or not the covered expatriate designation (Net Worth) was established occurred prior to this, from Line 25 of Part V (FMV).

Edit to add - The FMV is the sticking point. If the "Gift tax" rules come into being for FMV, and a deferred compensation item is to be "sold" on the day before renouncing, an ineligible pension becomes a lump sum cash amount (say for example $600,000). That (say) $600,000 could be "gifted", so it means (say) $600,000 being listed as FMV on Line 7. Or, is the FMV $0? As I said, I've seen examples where the (say) $600,000 was used. This is where I am unsure, and Hodgen does not make it clear. To be honest, I'm not sure anyone is really clear as to what is exactly the proper way to compute Part V of 8854. No matter where you look, there is a lot of avoiding the issue and giving a direct response. In other words - tons of waffle.